WA government cuts costs on deficit fears

The West Australian government is cutting costs in a desperate bid to keep the budget in surplus amid a sharp fall in iron ore royalties and a strong Australian dollar.

The Barnett government announced with its 2011/12 annual report on Wednesday that it had limited the number of employees in the general government sector, capped public-sector leave liabilities and ordered a 1.5 per cent cut in agencies' budgets for non-essential goods and services this financial year.

The measures are expected to save $328 million in 2012/13 and are in addition to a previously announced two per cent general government "efficiency dividend".

Treasurer Troy Buswell said the savings would not affect services to the public, but he warned that further cost-cutting measures may be taken in coming months.

"We ... may well be looking at other corrective measures as we head into the mid-year review," Mr Buswell told reporters.

While the state achieved a surplus of $649 million in 2011/12, compared with an estimate of $442 million, the outlook for the current year was challenging, Mr Buswell said.

The state had become increasingly reliant on royalties from the iron ore sector, as subdued property activity meant lower stamp duty income, he said.

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Royalties contributed only eight per cent of the state's revenue in 2008 but now accounted for 20 per cent, which meant an increased exposure to commodity prices, Mr Buswell said.

The state government in May forecast an average iron ore price of $US127.30 a tonne for 2012/13, but it fell below $US90/t recently and is currently around $US110/t.

If iron ore prices and the Australian dollar remain at current levels, the new savings may not be enough to avert a budget deficit, Mr Buswell conceded.

For every cent the Australian dollar rises against the greenback, the WA budget takes a $60 million revenue hit.

And for every $US1 the iron ore price falls, $30 million is wiped off the state's revenue stream.

It was too early to tell whether a structural economic change had occurred that needed to be addressed, Mr Buswell said.

"I'm not saying that it's not a longer-term structural problem - what I'm saying is that it's far too early to make that call," he said.

"The challenges in managing our recurrent or operating surplus are mainly revenue-driven challenges, and we will continue to address those challenges in a way that I think is appropriate, effectively making sure that in changing circumstances, we're prepared to cut our cloth to suit."

The annual report showed royalty income was down 9.4 per cent in 2011/12, mainly because the iron ore price was 9.9 per cent below budget forecasts.

The Australian dollar fetched an average 103.2 US cents during the period, compared with a budget assumption of 97.5 US cents.

These factors outweighed a two per cent increase in iron ore production, the WA government said.